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Hopes run high for the East Med

Possible major new discoveries, along with rising production and simmering regional geopolitics, make 2019 a year of reckoning

Egypt will be forging ahead in the coming 12 months, building on the success of the past three years, with more gas finds and exports of LNG. Eni is expected to announce a major new discovery at the Noor prospect, about 50km (31 miles) offshore Sinai. Together with a number of smaller gasfields, this will bolster Egypt's gas production and support LNG exports.

Eni will raise output at the Zohr gasfield to 3.2bn cf/d by the end of 2019, up 0.5bn cf/d from the originally planned production plateau, the icing on the cake of a remarkable project. Following completion of the negotiations between the Damietta LNG plant partners and the Egyptian government to settle an arbitration award against the latter, this additional gas from Zohr will be destined for liquefaction and export, mostly to Italy.

In the meantime, BP will also be expanding its operations in Egypt, committing to spend another $1.8bn in 2019 to speed up gas production. It will bring the Raven gasfield, in its West Nile Delta concession, on stream adding another 350mn cf/d to the Egyptian gas grid.

Shell is already exporting 300mn cf/d from its Idku LNG plant and is in advanced negotiations with Noble Energy to bring gas from Cyprus' Aphrodite field to utilise the remaining 700mn cf/d unused capacity of the plant. However, the fraught political situation in Cyprus and the increasing intensity of threats from Turkey may yet delay this.

Shell, having settled its dispute with EGPC, will complete development of West Delta Deep Marine 9B gasfield in 2019, bringing on stream 400mn cf/d of natural gas. Edison will also carry out offshore exploratory drilling, particularly in the promising North Thekah concession.

A major ExxonMobil discovery off Cyprus could alter irrevocably East Med geopolitics

Egypt will launch new offshore licensing rounds in the Red Sea and in the western part of its exclusive economic zone (EEZ) in the Mediterranean, both coming with great expectations. Demonstrating its confidence that much more gas will be discovered, the petroleum ministry has developed a new oil and gas production contract to encourage investment and exploration. Under the new deal, IOCs will bear exploration and production costs, but in return they will get a bigger share of the output, which they will then be free to sell as they wish, even as exports. This is the sign of a country confident that its gas supplies will not only meet domestic demand well into the future, but will also support significant exports. The trend may also be assisted by increasing diversification into renewables and coal-fired power generation.

A major target for Egypt in 2019 is to end all energy subsidies and catch up with full repayment of the debts owed to IOCs. This remarkable turnaround will be capped by continuing recovery of the country's economy, with GDP growth approaching 6pc.

These developments, and reforms implemented by the government, have encouraged Eni, Shell, BP and Edison to announce plans to expand their existing investments and activities, demonstrating their faith in the country. As a result, the petroleum ministry says it expects inwards oil and gas investments to exceed $10bn in 2019.

Egypt may also benefit from gas imports from Israel, helping it realise its aspiration to become the East Med's regional gas hub. Noble Energy and Delek may yet be able to sell gas to Egypt's domestic market, which will be a major achievement in many different ways. It will be one of the first projects to overcome regional geopolitics that beset East Med energy developments. It will also usher closer cooperation between Israel and Egypt.

Israel's hydrocarbon's sector will also achieve additional success in 2019, with completion of Leviathan's phase 1A delivering first gas by the end of the year, destined for the domestic market, Jordan and possibly Egypt. But securing export markets for the follow-up phases will continue to be challenging.

Yet more inter-governmental agreements will be signed promoting the much-talked-about East Med gas pipeline; but implementation will remain elusive. Its gas will be too expensive to secure sales agreements in Europe to justify making the jump from a political project to reality.

Another success story will be Energean's progress at the Tanin and Karish gasfields, acquired in 2016. Having achieved a final investment decision and registered on the Israeli Stock Exchange in 2018, Energean will move into the construction phase, with the likelihood that additional drilling will confirm increased gas reserves in 2019.

With Prime Minister Netanyahu's government surviving to see through its final year in office, Israel will also launch a second offshore licensing round. But without obvious export routes, its chances of attracting major IOCs will be low.

Continuity of the current Israeli government will also facilitate the formation in early 2019 of an East Med Natural Gas Cooperation Forum, comprising Israel, Egypt and Cyprus. This should foster closer coordination and prepare the ground for a more stable future for the East Med. New-found US interest for the region may provide additional encouragement for the successful launch of this much-needed initiative. In 2019, the US has promised to broaden its strategy and increase its presence in the East Med.

Lebanon could also join the forum, albeit at a later stage, further enhancing regional cooperation. Meanwhile, Lebanon has launched its first exploration phase, with the Total, Eni and Novatek consortium planning to drill its first well in Block 4 in 2019. The disputed Block 9 is being left until 2020, by which time it is hoped that the EEZ delineation dispute with Israel will be resolved.

Emboldened by the success of the first round, Lebanon will be launching a second licensing round, with results expected mid-2019.

$10bn+ - Egypt's 2019 inwards oil and gas investments

In Cyprus, much hangs on restarting negotiations in 2019 for a last-ditch attempt to find a political solution to reunite the island. At first sight, the signs are not that promising. The positions of the two sides are far apart, needing the intervention of a deus ex machina.

This could come in the form of a big discovery early in 2019 at Block 10, where ExxonMobil started drilling in late October. Promising seismic data and the proximity of the drilling target to the Zohr and Calypso gasfields underline its potential. Should a significant discovery be made and depending on quantities, ExxonMobil's preference is to construct an LNG plant in Cyprus. The island's location makes it ideal, for exports both to Europe, and to Asia through the Suez Canal, provided these are commercially viable.

But there is an additional requirement: to reduce regional geopolitical risk. The tripartite meetings that have taken place so far, and the setting up of the Gas Forum, have the potential to do this. Clearly, investments in gas production and export projects run into billions of dollars and are made for decades. As such they need certainties. Continuing geopolitical risk may cause delays.

A major discovery by ExxonMobil and the potential of LNG exports could alter irrevocably the geopolitics of Cyprus and the entire region. ExxonMobil came to the East Med specifically because of the prospect of such a major discovery. Should that become reality, the company is likely to pursue rapid realisation of LNG exports by all means available to it—technical, commercial and political. Such a discovery could act as a game-changer in 2019 to find a way out of the current political morass and allow the two sides in Cyprus, Greek and Turkish Cypriots, to benefit.

In the months ahead it is likely that Cyprus will proceed with the leasing of Block 7, which is also claimed by Turkey, based on Ankara's definition of the country's continental shelf entitlements. This interpretation, in effect, excludes the possibility of islands close to Turkey from having their own EEZs.

Turkey will continue its increasingly threatening rhetoric and may even take bolder action to enforce its arguments, by expanding its drilling activities in the East Med to include Cyprus' undeclared EEZ, west, north or east of the island. But it is hoped that such aggressive actions would not deter commercial activities. Turkey is an important player in the region, and its best interests would be served by abandoning its adversarial attitude and adopting one of cooperation instead.

Charles Ellinas is CEO of EC Cyprus Natural Hydrocarbons Company and an East Med energy analyst

**The Early Bird registration rate for the Eastern Mediterranean Gas Conference  ends on February 21st  - register here**


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